1. Hedge Funds are Now Banks

I write from time to time about the economic structure of modern multi-strategy “pod shop” hedge funds. Stereotypically a hedge fund invests its clients’ money and gives the clients the returns, after taking some fees — classically 2% of assets and 20% of returns — for itself. The modern pod shops are not like that. They charge “pass-through fees,” meaning that they invest their clients’ money, earn returns, pay their expenses out of the returns, pay their employees large performance-based bonuses out of the returns, and then give most of what’s left to the clients. The deal with the clients is not “we get 20% of the returns and you get 80%.” The deal with clients is more like “we aim to meet our cost of capital by giving you a risk-adjusted return, net of fees, that you are generally happy with.”

"In this, I have argued, the hedge funds are like banks, or really like any other business"

The analogy is not exact. The clients of a hedge fund are not actually shareholders of a business. They have a contract — a limited partnership agreement — with the hedge fund, and the contract lists what expenses the fund can pass through to the clients, and the list is not literally “whatever we want.” The hedge fund has to disclose in advance the specific categories of things that it might spend client money on.

2. Financial Markets Magically the Present Make

• Insane AI revenue doesn't exist.
• To build the capacity for it, AI companies need to spend trillions.
• Nobody has trillions, yet equity of AI companies trade like they will.

all of the future AI cash flows are not directly observable — you can’t extrapolate them from current AI cash flows or anything — but they can be inferred from equity-market enthusiasm for AI.

This is, you know. This is fine. This is the point of financial markets, to tell you what the future will be like. Modern AI has a science fiction flavor to it, and its future economic impact is, at this point, necessarily speculative. ... The market is telling you that, in a post-AGI world, a lot of money is going to flow to AI equity investors.

3. ETFs, the worst-than-Marxism passive investors, make the market more efficient

You sometimes hear that index funds make stock prices less efficient. That argument goes something like: “Index funds buy stocks indiscriminately, and in fact they tend to buy high (as companies get big and are added to indexes) and sell low (as they get smaller and drop out). As markets are dominated by index funds, there will be no one left to make prices correct.” But the point here is that index funds reduce the constraints on short sellers, which has a tendency to make prices more efficient: If some stock is overvalued, short sellers can step in to sell it, because they can borrow the stock easily.